News

Abstract: Global trade is growing significantly, outpacing growth in nominal world GDP. In 2018 alone, the WTO forecasts trade growth between 2.1% and 4%. The Asian Development Bank (ADB) notes particularly strong growth in emerging markets, with an emphasis on APAC regions. Despite this, inefficiencies abound: ADP estimates the unmet demand for trade finance at ~$1.5 trillion in 2016, with Asia and Africa accounting for 40% and 25%, respectively. Furthermore, 36% of rejected trade finance transactions had been considered viable. Micro, small, and medium-sized enterprises (MSMEs) face the biggest difficulties in accessing trade finance, representing 74% of total rejections last year. Therein, however, lies the promise: the cost and complexity of anti-financial crimes due diligence causes most rejections. To capture this immense value going forward, firms must be willing to fundamentally shift from laborious and predominantly paper-based processes that dominate and define the current global trade finance ecosystem.

Enter Blockchain.

Blockchain describes decentralized software platforms that enable a distributed ledger system (DLT). It allows authorized participants to track and record transactions and assets in the absence of a single central trust authority, e.g., a bank. Blockchain networks have the capacity to create proof of ownership across the end-to-end trade finance process by using digital signatures that rely on both public and private encryption keys only known to authorized members, thus curtailing fraud and collusion. In addition, these networks also enable peer-to-peer exchange of data, assets, and currencies through rules-based smart contracts - a set of promises, agreed on between parties and encoded in software, which are performed automatically when criteria are met. As a result, payment flows are more efficient, transparent and cost-effective, while also providing temper-proof record keeping.

This presentation aims to demonstrate that DLT has significant potential to enhance the existing trade finance business model, particularly as applicable to supply chain financing instruments. Specifically, we are analyzing how Blockchain-based solution can fundamentally change traditional instruments such as letters of credit and trade credit insurance. The implementation of such a nascent technology is not without its challenges. Key issues include the general lack of familiarity among market participants, as well as the need to integrate this technology with existing ERP systems. Critically, not all market participants are incentivized to partake in this revolution. For example, the business model of many mid-market trade credit funds relies on the very existence of information asymmetry and the lack of market transparency.

To enable the seamless and fully-integrated adoption of DLT within the broader trade finance ecosystem, the industry must be called upon to take concrete, global steps that facilitate and accelerate sustainable digitization. Such an approach will heavily rely on market leadership by key buyers to ensure the establishment of a Blockchain technology type, such as public, private, or a hybrid. In addition, particularly for the participation of smaller suppliers, support infrastructure and potentially subsidies for the operation of Blockchain nodes must be attainable.

Based on long-form expert interviews with key ecosystem stakeholders, including financial services providers along the value chain, buyers, suppliers, as well as logistics and technology providers, we explore the adoption sequence amongst ecosystem stakeholders, as well as the key business and technology hindrances that exist in today’s market environment.

Lastly, this presentation presents an overview of the industries that stand to gain handsomely from implementing DLT, namely electronics, automotive, aerospace, and transportation. We provide key recommendations on how to best leverage the current infrastructure to digitize internal practices and processes via blockchain technology, particularly with regards to the selective sharing of trade information among participants. Rather than through direct operational savings, we imagine the Blockchain impact to materialize via the enablement of a set of completely new, data-driven trade financing products currently not available in today’s marketplace. An on-going, comprehensive field study aims to assess the current pulse of the market, and to quantify the perceived feasibility among trade finance ecosystem representatives.